A Comparison between Micro Lending and Crowdfunding for New Businesses

Over the years, it has only gotten harder and harder to get loans from banks. In pursuit of reducing their risks, banks are now very picky with who does, and who does not get a loan. Needless to say that it’s always the lower income groups that get pushed out of the bracket – as a result, their opportunities are limited, and the income disparity grows. Seeing as these limitations were being faced by large populations, newer funding avenues have emerged, and are slowly leaving behind bank traditional bank loans. The two we’ll be discussing today are micro-lending and crowdfunding.

What is micro-lending?

Micro-lending is the concept of giving out small loans to people, usually entrepreneurs, who need the loan to start/ set up their business. The way that this differs from a loan is that micro-lenders don’t intend to capitalise on the loan they give (no interest on borrowed funds), but instead, aim to help populations that are limited by financial constraints and inaccessibility to traditional bank loans.

What is crowdfunding?

Crowdfunding is a donations based fundraising concept to raise money for personal or non-personal causes. This is done through fundraising india platforms such as Impact Guru. You set up a campaign on a fundraising india website, tell people about your cause, and request them to make a donation towards it if the cause appeals to them. With crowdfunding too, the money raised is entirely debt-free, and the whole process takes place online, making it very quick and efficient.

Now that we know what each of these concepts actually imply, let’s discuss how they’re different from each other.

Scope

While micro-lending is usually limited to entrepreneurs who need capital to start their business, or to expand an ongoing business. Crowdfunding on the other hand, can be done by anyone and everyone, for all sorts of causes. It is through a fundraising india that individuals have been able to raise funds for medical treatments, for education, building sanitation facilities in rural areas, creative projects, start ups& social enterprises, environmental causes, and so much more. To put it simply, the scope of crowdfunding is much more.

Financial implications

With crowdfunding, there’s no limit to how much you’re allowed to raise. It all depends on the virality of your campaign, and the effort you put into making it successful. Even if you raise more than your target amount, the funds are yours. This freedom is not available with micro-lending, because the lender is usually just one person, who will only give you a predetermined fixed amount of money.

Repayment

Since crowdfunding is primarily donations based, you don’t repay any amount of the money you raise through your campaign. With micro-lending, you don’t repay with interest, but the principal is usually paid back after the start-up for which is was borrowed, successfully makes money. If the start up fails, the lenders funds may not be repaid at all – making it high risk for the micro-lenders.

All said and done, the most important element that is common between the two is that of having the aim to help – be it helping someone with investment for a start up, of crowdfunding for medical treatment. It is upto each person to determine which one works best for them